Past experience is the foundation on which our beliefs about the desirability of different policies and institutions are mainly based … While the events of the past are the source of experience of the human race, their opinions are determined not by the objective facts, but by the records and interpretations to which they have access.
This was Friedrich Hayek’s powerful warning that misinterpreting the past can lead to misguided policies in the present. A prime example is the history of poverty in Britain over the last half century. Its misinterpretation has become standard both in the UK and on the continent.
Looking at the evolution of conventional relative poverty (using a threshold of 60% of contemporary median household income), there is a clear pattern: the poverty rate was stable for decades at around 14%, until, from 1983 on, it suddenly recorded a gigantic leap. In 1990, it reached a record of 24%, not falling by much since then. The conclusion usually drawn is that the market-oriented policies pursued in the 1980s may have improved economic performance, but this was achieved at the expense of the poor.
It must be kept in mind, though, that poverty analyses are extremely sensitive to the poverty measure employed. The Institute for Fiscal Studies has experimented with some alternative measures. They have set a poverty line at 60% of the median household income of the year 1996/97, and applied it from 1961 to 2006, adjusted to each year’s price level. From this, a totally different picture is obtained.
According to the fixed-threshold measure, more than half of the population lived in poverty in the early 1960s. The rate fell rapidly over that decade, while in the 1970s it showed marked volatility. Most strikingly, the explosion of poverty of the 1980s that the conventional figure shows is not mirrored. Poverty now falls from 1982 to 1988, and then stagnates for a while to fall again after 1995.
Why this extreme divergence? Plotting both poverty measures against GDP (at constant prices) gives a straightforward answer: the absolute measure has a strong negative correlation with economic growth; the relative one does not. Clearly, this does not mean that growth alone will solve all poverty-related problems. However, misrepresenting the policy outcomes of an era which set Britain on a path of greater prosperity will do nothing to improve the lot of the poor.